Income Statement

($ millions) Year 0

Revenues (Sales) $800 Operating Costs $300 Depreciation $100 Amortization $0 EBIT $400 Interest Expense $180 EBT $220 Taxes (25%) $55 Net Income $165 Dividends $45 Add to RE $120

Balance Sheet

Cash $ 100 Receivables $200 Inventories $150 Current Assets $450 Net Fixed Assets $100 Total Assets $550 Accounts Payable $50 Notes Payable $10 Accruals $30 Current Liabilities $90 Bonds $110 Common Stock $150 Retained Earnings $200 Total Liab & Eq $550

*comment section is to determine if it is good or not good*

1. Find the following ratios for Year 0 and comment on each: Comment current ratio inventory turnover DSO Fixed asset turnover total asset turnover debt ratio TIE profit margin ROA ROE Ind Avg Ratio 3.5 X 5.1 x 62 days 6X 1.2 X 41% 1.8 X 15.1 % 18.1 % 30.7 % Extended DuPont equation 2. Central City Construction Company, which is just being formed, needs $1 million of assets, and it expects to have a basic earning power ratio of 20 percent. Central City will own no securities, so all of its income will be operating income. If it chooses to Central City can finance up to 50 percent of its assets with debt, which will have an 8 percent interest rate. Assuming a 25 percent federal-plus-state tax rate on all taxable income, what is the difference between its expected ROE if Central City finances with 50 percent debt versus its expected ROE if it finances entirely with common stock